Argument recap: Court seeks clarity on the applicability of the FICA student exemption to medical residents

Are medical residents students who also work or employees who also study? This question was the focus of yesterday’s oral argument in Mayo Foundation v. United States. The Justices (with Justice Kagan recused) peppered counsel on both sides with variations of this main question in an attempt to nail down precisely whether Congress meant to exclude medical residents from FICA taxation and whether the current Treasury regulation is a permissible and reasonable interpretation of the statute.

Justice Ginsburg kicked off questioning by asking whether all institutions that employ medical residents are schools. Ted Olson, arguing on behalf of petitioner Mayo Foundation, hesitated to give a categorical response to the question. The issue is relevant, Justice Ginsburg continued, because it would be “unseemly” to exempt from Social Security tax residents who work at schools, and impose the tax on other residents whose training is approximately the same. Olson responded that although there may be some medical facilities that employ residents but are not schools, he was not familiar with any such program accredited by the Accreditation Council for Graduate Medical Education.

Justice Sotomayor focused on the employment of medical residents when she asked whether they worked under supervision. Olson responded that even though no one stood over the residents’ shoulders at all times, they were being supervised during the whole residency program. Seemingly unconvinced, Justice Sotomayor sought a clearer line “between a student who is working and a worker who is studying.” She cited an example of the general counsel of a university who is regularly enrolled in classes while working forty hours per week. Olson’s response was that this situation is governed by the “predominance requirement” imposed by the IRS and is a question of fact rather than a question of law. However, when Justice Sotomayor tried to apply the same test to the case of medical residents – contending that someone who works forty hours a week and makes $50,000 to $60,000 a year is primarily an employee – Olson countered that, as it has been for many years in the IRS’s interpretation of the statute, the amount of money that someone receives is immaterial. Olson emphasized that Mayo Foundation was not challenging the predominance requirement, which would govern the case of the university general counsel who decides to take classes at night. The main difference, he argued, is that medical residents “cannot achieve what they need to achieve for board certification and hospital privileges except by having clinical experience.”

Justice Ginsburg shifted the questioning back to the school environment and contrasted the work that medical residents do with administrative or clerical duties of a work/study student, who holds student status and provides services in order to earn some money. Olson agreed that the current regulations would allow an exemption for a student who performed services unrelated to his or her education, but he countered this hypothetical with the argument that the goal of the medical residents’ services is education, not to earn a living.

The issue of deference to the administrative agency was raised by Chief Justice Roberts, who suggested that if anyone can draw the line in a categorical way, it ought to be the IRS. Olson responded that the IRS has attempted to draw such a categorical line with its new regulation, but it did so only after having lost multiple cases in front of five courts of appeals that disagreed with the IRS’s interpretation of the statute.

The argument’s light moment came when Justice Breyer sought to clarify the definition of the word “incident” in the regulations’ reference to services that are “incident to” study. When he noted that he was found reading the statute in the previous oral argument and he was reading the dictionary in this one, Justice Scalia commented, “We don’t know whether that’s a step forward or backward.” Olson then accepted the definition of “incident” as applicable to the case of medical residents since their services are incident to their education – in fact, they are subservient to the residents’ educational process and are part of it.

Arguing on behalf of the United States, Assistant to the Solicitor General Matthew Roberts began by saying that medical residents are employees who are paid for their services and are not included in the student exemption. He emphasized that the student exemption is “not a broad exclusion for apprenticeships and other learning jobs” in which individuals work long hours and make substantial salaries; instead, it is a narrow exception for students who perform services at school where they are regularly enrolled in classes. In response to a hypothetical from the Chief Justice in which medical residents were only paid for two hours a day but were required to accrue long hours only for the sake of experience, Roberts explained that the exemption would not apply to those medical residents either because the unpaid hours would still not qualify them for student status. In response to the question Justice Ginsburg originally posed to Olson, Roberts presented an example of an employer that was not a school but nonetheless hired medical residents. Such a scenario, Roberts argued, illustrated a broader principle that the student exemption is not an “apprenticeship exemption.”